Morgan Stanley Capital International's inclusion of A shares in its widely tracked indices - starting from next summer - could be a catalyst for leading global investors to pile into the Chinese mainland's onshore markets despite concerns about liquidity, according to heavyweight analysts at the world's largest asset manager.
Wenjie Lu, who joined BlackRock in February as the China investment strategist and was previously with UBS Securities, said flows into mainland's equities were still expected in the second half of this year.
But, the strategist added, the liquidity of the A-share market was an issue as China's financial leveraging will continue and A-share market will take time to attract more fund flows.
Lu added that the onshore market is included in the benchmark emerging-markets index, but the way overseas investors accessed the onshore market still needed to improve.
Lu said he believed capital will tend to flow into large and middle-cap companies in both onshore and offshore markets in the second half - as many global investors have large amounts of cash and are willing to improve their exposure to emerging markets.
Lu said the Hong Kong stock market had received inflows from both global and mainland investors this year and the trend was expected to continue.
He said technology was the best-performing sector so far in 2017 and was still preferred but valuations were high.
The BlackRock strategist added that he favored financial and industrial sectors in the second half, as they were undervalued.
Belinda Boa, the head of Active Investment for Asia-Pacific and CIO of Emerging Markets, Fundamental Active Equity at Black-Rock, said the company preferred equities in emerging markets, Europe and Asia including Japan.
On China's economy, Lu said the economic growth was becoming more sustainable, backed by financial deleveraging and support for the private sector.
The government has already started financial deleveraging and many financial institutions have been cutting exposure to shadow banking credit, giving the overall financial system much cleaner balance sheets and more sufficient capital for financial institutions to protect themselves, Lu added.
tingduan@chinadailyhk.com
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